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Lordsvale Finance V. Bank Of Zambia Notes

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LORDSVALE FINANCE V. BANK

OF

ZAMBIA

FACTS The claim arises in this way. On 24 April 1984 an international syndicate of banks entered into an oil import facility agreement with the defendant, a bank, under which a facility of U.S.$130m. was made available to the defendant. Amongst the participating banks were Sumitomo and B.C.C.I. On 19 July 1985 another international syndicate of banks, again including Sumitomo and B.C.C.I., entered into a further oil import facility agreement with the defendant in the sum of $100m. In the course of 1986 the facility advances fell due for repayment, but the defendant defaulted. On 7 March 1995 solicitors acting on behalf of the plaintiffs made a demand on the defendant for payment of the amounts due under the two agreements. The relevant clause stipulating an additional 1% margin: "Default Interest and Indemnity. (A) In the event of default by the borrower in the payment on the due date therefor of any sum expressed to fall due under this agreement (or on demand in respect of any sum expressed to fall due under this paragraph (A)), the borrower shall pay interest on the participation of each bank in each such unpaid sum from (and including) the date of such default to (but excluding) the date on which such sum is paid in full (as well after as before judgment) at a rate per annum equal to the aggregate of (i) 1 per cent., (ii) the margin and (iii) the cost as determined by such bank of obtaining dollar deposits (from whatever source or sources it shall think fit) to fund its participation in the unpaid sum for such period or periods as the agent may from time to time determine." Defendant's argument: The defendants contend that, inasmuch as the constituents of the default interest under article 10.03(A) include at (i) 1 per cent., a rate completely unexplained, in addition to the margin (defined in article 1 as 1 ½ per cent.) and the cost of obtaining dollar deposits to fund the bank's participation, the 1 per cent. is a penalty. It is said to be in terrorem the borrower, its sole function being to ensure compliance with the agreements. This point is of considerable importance for English banking law because it is a well known fact that a default interest rate uplift is very widely used, particularly in syndicated loans, such as this. HOLDING It is clear that, if a loan agreement were to provide that upon the happening of a default in payment by the borrower the rate of interest were to be increased with retrospective effect, that which would be payable on default would be a sum in addition to the

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